Sept. 20 (Bloomberg) -- Australia, the world’s biggest iron
ore and coal exporter, can’t escape fallout from economic
stagnation in the U.S. and Europe and should be saving more for
leaner times, UBS AG’s top banker in the nation said.

“It would be silly to think that none of this is going to
have an impact on us -- it will,” Matthew Grounds, 42, chief
executive officer of UBS’s Australian business, said in an
interview on Sept. 14, before the bank disclosed a $2.3 billion
unauthorized trading loss in London. “That’s got to impact
China and that’s got to impact Australia.”

China is Australia’s largest trading partner and Grounds
said he doubted commodity prices or the Australian dollar can
hold current values. UBS workers in Australia will be among
those hit as the Zurich-based bank cuts jobs, said Grounds,
who’s also the joint global head of investment banking.

UBS, the largest foreign investment bank in Australia,
repeated a call for Prime Minister Julia Gillard to use the
proceeds of the biggest mining boom since the 19th century to
set up a new wealth fund. The MSCI World Index has plunged 14
percent since July 22 on concern the global economy will slip
back into recession amid a worsening sovereign-debt crisis.

“If we’re looking at a worst-case scenario, the two
avenues that would really feel the effects of that global
downturn would be investment and terms of trade,” said Helen
Kevans, an economist in Sydney at JPMorgan Chase & Co. who sees
a 40 percent chance of a U.S. recession. “A lot of firms would
postpone investment. That would impact jobs. It would also
influence commodity prices and terms of trade so we wouldn’t get
that lift to national income.”

Mining, Carbon Taxes

U.S. economic growth weakened during the first half to its
slowest pace since the recovery began. Meantime, Australia’s
terms of trade, or export prices relative to import prices, are
at all-time highs, helping deliver record profits for Melbourne-based BHP Billiton Ltd., the world’s biggest miner.

Gillard’s government, which is proposing a mining tax as
well as a levy on carbon emissions, also plans to build a A$36
billion ($37 billion) nationwide high-speed broadband network.

“Our biggest fear is that we emerge from this period with
nothing to show for it,” Guy Fowler, 43, UBS’s head of
investment banking in Australia, said in the same Sept. 14
interview. “You come to the end of the process and ask: what
have we got? Fast internet. You can only dig this stuff up and
sell it once. We should be building the biggest sovereign wealth
fund of all time.”

Norwegian Savings

Australia’s Future Fund, established in 2006 by the then
ruling Liberal-National Coalition government to cover the
pension costs of retiring politicians, judges and public
servants, had A$75.2 billion of assets at the end of June.

In Norway, petroleum revenue has allowed the country to
build a $544 billion sovereign wealth fund. Chile created an
Economic and Social Stabilization Fund in 2007 to help offset
commodity price swings. That fund held $13.4 billion at the end
of July, according to the Ministry of Finance’s web site.

Grounds questioned the timing of a tax on Australia’s
biggest emitters.

“We have an economy supported by carbon-intensive
industries,” Grounds said. “Does it make a lot of sense to be
the leader in the world in taxing your carbon economy? I
wouldn’t have thought so, not in today’s market environment.”

The country’s gross domestic product rose 1.2 percent in
the second quarter from the previous three months, the most in
four years, driven by China’s demand for iron ore and coal.
Mining companies are helping prop up the economy while retailers
such as David Jones Ltd. and Myer Holdings Ltd. struggle to
attract consumers.

Lucky Country

Still, Grounds said Australia is “fortunate.” An
unemployment rate of 5.3 percent is almost half that of the euro
zone and the 9.1 percent of the U.S. Economic expansion in
Australia will accelerate from an average of 2 percent in 2011
to 4.5 percent in 2012, according to the central bank. That
would be the envy of most nations, Grounds said.

UBS, Switzerland’s biggest bank, said Sept. 18 its
unauthorized trading loss, estimated three days earlier at $2
billion, amounted to $2.3 billion. UBS has covered the risk from
the trading and its equities unit is operating normally within
risk limits, the bank said.

“It’s business as usual in Australia,” Erica Borgelt, a
UBS spokeswoman in Sydney, said in an interview yesterday,
declining to comment on the trading loss.

‘Really Tough’

UBS said last month it would eliminate about 3,500 jobs, or
5.3 percent of its workforce, to reduce costs. Profit dropped 49
percent in the second quarter as earnings slumped at the
investment bank.

“Globally, we’re going into an environment which is going
to be really tough,” Grounds said. “We have a significant
pipeline of capital markets deals, particularly in the northern
hemisphere. If we can get them all done, we’ll have a reasonably
good year. If we don’t, nobody else is going to get them done
either.”

Australia-born Grounds, who joined UBS in 1998, said he’s
“comfortable” with the outlook for the business in his country.

UBS has been the top-ranked underwriter of equity sales and
rights offers in Australia every year since 2005, according to
data compiled by Bloomberg. The bank is fifth among arrangers of
mergers involving Australian companies for 2011, versus 10th
globally. It topped Australian M&A rankings in 2010.

Fowler, who has worked at UBS for almost two decades, has
attributed the success of the business to the longevity of its
relationships with clients. Even that might not be enough should
economic malaise spread east.

“The fear clearly is that if China really slows down, and
we start to have a slowdown in the very strong sectors that are
holding everything else up at the moment, we’d be in for a tough
time,” Fowler said.